Market sees little room for interest rate drops before mid-2023

Despite the Central Bank reinforcing the prospect of an end to the cycle of hikes in the basic interest rate (the so-called “monetary tightening”), the market sees little room for anticipating the fall in the Selic and expects some easing only in the middle of the year. next.

Less optimistic about the forecasted inflation scenario ahead, some analysts heard by Sheet consider that the BC may start cutting the base rate from the second quarter of next year, others expect that the decline will start only in the second half of 2023. They reflect the majority view of the financial market.

In the Copom (Monetary Policy Committee) reference scenario, inflation projections dropped to 6.8% this year, above, therefore, the BC target, which is 3.5%, with a variation of 1.5 point—that is, 2% to 5%.

For 2023, the year in which the target is 3.25%, the projections rose to 4.6% and, for 2024, the BC collegiate maintained the forecast of 2.7% – below the center of the target, which, that year , is 3%.

Although it usually works with a horizon up to 2023, the committee extended the assessment interval to the first quarter of 2024, to smooth the effects of recent tax measures, which feed inflation projections for this and next year.

The projection is that the inflation index accumulated in 12 months in the first quarter of 2024 reaches 3.5%.

Economists’ estimates for 2022 and 2023 inflation, according to the Focus survey published on Monday (1st), are at 7.15% and 5.33%, respectively – both above the ceiling of the targets pursued by the BC . For 2024, the median is 3.3%.

Considering the uncertainties that the government will balance public accounts in 2023, due to the possibility that measures to stimulate demand will become permanent and maintain pressure on inflation, the market expects to see the Selic raised for a longer period of time.

“People appreciate that [a taxa básica] stay at that level [em torno de 14%] until the middle of next year. The BC would start cutting interest rates at the fourth meeting of 2023 [20 e 21 junho]when the monetary policy horizon will have already turned towards 2024”, said Maurício Oreng, macroeconomic research superintendent at Santander.

For the economist, the BC will gradually reduce the contractionary monetary policy (higher interest rates), taking the Selic to 12% at the end of 2023.

Rafaela Vitória, chief economist at Banco Inter, also sees room for interest rate cuts in the second quarter of next year, just after observing a period of weak economic activity.

The analyst even talks about a technical recession, with a drop in GDP (Gross Domestic Product) both at the end of 2022 and at the beginning of 2023, when the economy will fully feel the lagged effects of monetary policy.

“The Central Bank will wait a while for the next government to assemble a team, to have a line of policies to follow so that it has the comfort of cutting interest rates together with confirmation that inflation is giving way”, he said.

In its projections, the Selic will fall to 9.5% at the end of next year.

On the eve of the last Copom, BNP Paribas revised its base scenario, pushing the expectation of a drop in the Selic to the second half of 2023.

“The realization that I could start cutting [juros] in the second trimester it won’t work anymore. My impression is that it will be for later. End-of-year interest rates will also be higher,” said Gustavo Arruda, head of economic research for Latin America.

In the view of the French bank, the deteriorating fiscal outlook, higher inflation expectations for 2023 and 2024 and higher-than-expected economic activity figures are consistent with a tighter monetary policy for longer. As a result, the interest rate projection for 2023 went from 10.5% to 12%.

Itaú, which expects to see the Selic rate reach 9.75% by the end of 2023, is another bank that is considering the possibility of starting interest rate cuts only in the second half of next year.

According to Fernando Gonçalves, superintendent of economic research, some hypotheses need to be materialized, such as “a perception of minimal fiscal sustainability and a reasonable fiscal framework that allows this interest rate cut”.

According to the expert, the resumption of collection of federal taxes on fuels in 2023 adds a dose of uncertainty to the scenario. “If there is a higher inflation rate next year, this could generate inflationary inertia for 2024 and reduce the BC’s propensity to cut interest rates,” he said.

For Marco Caruso, chief economist at Banco Original, the numbers provided by Copom in its reference scenario open space to imagine that the BC could cut interest rates sooner than the market is predicting. However, he does not believe that this will materialize and predicts a reduction in the fourth meeting of 2023, at the turn of the second semester.

“I understand that, as I have higher inflation, it is necessary to stay with high interest rates for longer. A little less than a year of interest stopped at 13.75% to be able to observe a stronger disinflation”, he said.

The analyst estimates that the Selic will end 2023 at 11%. “The bias of this number, for me, is still upwards. There will be disinflation, but it will be very focused on the most volatile items, such as fuel and food. When I look at services, I see a reasonable pressure still happening”, he commented.

In a report, Goldman Sachs also said it expected Copom to wait until the end of the second quarter or possibly the third quarter of 2023 to start cutting interest rates. The analysis is signed by Alberto Ramos, director of the economic research group for Latin America at the bank.